February 11, 2014
We hope 2014 is off to a good start for you and your families. We wanted to touch base with you for a few reasons, and the first of those reasons is to give you information about when to expect your tax documents for tax year 2013.
Pershing 1099-Rs were mailed out by 1/31/14. (1099-R reports are for those who have taken distributions from retirement accounts). The first round of Pershing’s regular 1099’s will go out on February 18th. There will be another batch mailed on February 28th and the final mailing is scheduled for March 17th.
For NFS accounts, 1099-Rs have all been mailed as of January 31st and the regular 1099 reports started to be mailed the week of January 27th. Additional batches will be mailed out on the following dates: Feb. 11th, Feb. 18th, Feb 28th and March 17th.
So if you want to make sure you do not receive any corrected 1099s for any of your accounts, you may want to wait until after March 17th to send these documents to your accountant. If you do receive a corrected report after filing, there may be additional costs if an amendment is required.
If you have any investments that issue K-1s (these are typically limited partnerships) the majority of those will be mailed out by mid-March. The exception to this would be some private equity K-1s which are usually issued well after the tax filing deadline and require an extension.
Many of you have been asking about your advisory fees on managed accounts. Please know that these are now listed on the 1099 reports you will receive, so you do not need to call and get that information as you were required to do in the past. Advisory fees may be considered to be deductible, so it does not hurt to point those out to your accountants.
If you haven’t received your 1099’s by the end of February, then please feel free to reach out to our office and we can send you any missing reports. Please keep in mind that we tend to have much higher call volumes during tax time, so if you do need copies of any of your tax documents before a meeting with your accountant, please allow sufficient time for us to get back to you with the documents.
The second reason we wanted to reach out is to share some of our thoughts on what has happened in the equity markets, both domestic and internationally over the first few weeks of 2014. The markets have not had what is considered a technical “pullback” since the 3rd quarter of 2011. The global stock market was up over 20% in 2013, however, more diversified portfolios -hile reducing overall risk-did not have the same types of returns. In fact, the Barclays US Aggregate saw its first annual drop since 1999. While many other asset classes suffered as well in 2013, the stock market tends to steal the spotlight in the press. For this reason, we saw a $349 billion inflow to stock funds. Unfortunately, emotions often lead investors to do the wrong thing at the wrong time. It is for this reason that the average investor in the S&P 500 tends to significantly underperform the index.
Heading into 2014, most professionals/institutional strategists believe that we were overdue for some kind of pullback or correction in the equity markets. However, the average investor’s appetite for equity exposure has only increased. This is often the tendency when investors allow emotions to rule their decisions. They tend to want to buy last year’s best performers instead of those asset classes that may be more attractive from a valuation standpoint.
The chart below suggests that it has been far more profitable over the long term to buy the worst performer from the previous year, rather than the best performer.
We are not suggesting that you go out and invest in last year’s worst performers. Rather, what we have been recommending and still believe in today is a more globally balanced, diversified portfolio2 that is reflected in the green line above. As you can see from the chart, the end of this ride is very close to the end of the red line, however, you took far less risk and experienced far less volatility along the way.
It is for this reason that we construct our portfolios using bull market, bear market, and alternative strategies1. While every client’s goals, objectives, and risk tolerance is different, our overall goal is not to capture 100% of the upside of any one market, but to attempt to minimize volatility and offer more downside protection over the long-term.
As always, we are here to answer any questions or concerns you may have.
Bernie, Brad & Samantha
1 Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees Alternative investments can be volatile. Often managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently higher risk. There is often no secondary market for an investor’s interest in and none is expected to develop. There may be restrictions on transferring interests. These products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S.markets. Additionally they often entail commodity trading, which involves substantial risk of loss.
2 Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions
Securities offered through Registered Representatives of NFP Advisor Services, LLC, A Broker/Dealer and Member FINRA/SIPC
July 29, 2013-2nd Quarter 2013 Market Performance Commentary
By now, we all should have received our second quarter statements from our various investment accounts. We were a bit surprised by the large variance in returns when looking at different holdings and strategies. As we continue to monitor our accounts and managers, we felt the need to look into this more. The following is our assessment:
Though extremely volatile, the second quarter was generally a positive quarter for domestic equity holdings. So if your portfolio is comprised of 100% US stocks or mutual funds, you are likely very happy. In fact, year to date through 6/30/13, the return of the S&P 500 is +13.8%.* Most of the positive returns in Q2 were isolated to domestic stocks. One could almost compare the performance of US stocks to today’s athlete who uses performance enhancing drugs (PED’s). For those that use or rely on them, performance is markedly better for a period of time. However, when the stimulants are removed, performance doesn’t usually return to where it was, but often gets much worse than before the use. Investors in domestic stocks are consuming the Fed’s monetary enhancements and performing well, but what happens when injections stop? We have been to several investment conferences since the quarter’s end and very few money managers will tell you that they see compelling valuation opportunities left in domestic stocks.
We have always and will continue to stress diversification. When constructing our portfolios, we are, in general, globally diversified. Our portfolios are comprised of stocks and bonds both domestic and foreign, developed and emerging, alternative investment strategies, and at times, variable annuities. We believe that over the long term, this is the best formula for achieving appropriate returns while diversifying risk and lowering the volatility of the overall portfolio. JP Morgan just released the performance figures for a global asset allocation portfolio. This allocation index is comprised of 25% S&P 500, 10% Russell 2000, 15% in developed foreign markets, 5% in emerging foreign markets, 25% in Domestic Bonds, 5% US T-bills, 5% Reits, 5% commodities, and 5% market neutral. This well-diversified asset mix was only up 4.5% year to date through 6/30/13.*
(Click on image to enlarge)
Many of us did not realize the significant bond blood bath that occurred in May and June. US Treasuries, which are generally considered safe, are -2.4% year to date through 6/30/13.* Stocks and bonds invested both internationally and in emerging markets, as well as commodities, fell significantly during the same time period. Does this mean the end of diversified portfolios moving forward? Of course not. Markets move in cycles and while the US large cap stock market has been the standout performer over the 3 of the past 4 years, there will come a time again when international outperforms domestic. This is why it is important to remain globally diversified.
However, we believe that minor adjustments may need to be made to certain portfolios. We are trimming our more traditional fixed income holdings as we see the greatest danger coming from this sector in the form of potentially rising interest rates. We have been adding to certain alternative investment strategies, which should not be as interest rate sensitive. Since some of these alternative investment vehicles are not traded on a daily basis, they should not be as affected by the day to day emotional moves seen in bond and stock markets. They also can provide better yield than many traditional bonds given this historically low interest rate environment we are experiencing.
I have always told you that we cannot predict the direction of the markets with absolute certainty. Through my 35 years in the business, I have attempted to combine discipline, patience, and a long-term focus. I believe this discipline increases the odds that our clients objectives can be achieved. Chasing returns in the short-term is rarely a winning formula. In closing, we believe that the chart above makes a very strong case for globally diversified portfolios (as represented by the Asset Allocation Box).
Of course, if you have any questions, please do not hesitate to call me.
Enjoy the balance of the summer.
Securities offered through Registered Representatives of NFP Advisor Services, LLC, A Broker/Dealer and Member FINRA/SIPC
Investment Advisory Services offered through Investment Advisory Representatives of NFP Advisor Services, LLC a Federally Registered Investment Advisor. Bernard R. Wolfe & Associates, Inc. is an affiliate of NFP Advisor Services, LLC and a subsidiary of National Financial Partners Corp., the parent company of NFP Advisor Services, LLC This site is published for residents of the United States only. Registered representatives and investment advisor representatives of NFP Advisor Services, LLC may only conduct business with residents of the states and jurisdictions in which they are properly registered. Therefore, a response to a request for information may be delayed. Not all of the products and services referenced on this site are available in every state and through every representative or advisor listed.
For additional information, please contact the NFP Advisor Services, LLC Compliance Department at 512-697-6000
It has been a while since our last commentary. Up until this past week, the markets of 2013 have been a continuation of what we experienced in the last half of 2012. We have had lots of strength with very little volatility. As we mentioned in our last communication, we still feel that there is a disconnect between the stock market’s prices and the economic reality. With that said, up until last week, the markets had continued to hit new highs.
Unemployment recently hit a four-year low of 7.5%.1Since corporations have record levels of cash on their balance sheets, mergers and acquisitions have increased. This creates confidence and stimulates economic activity. A lot of the risk from last year has been resolved. Greece hasn’t threatened to break out of the European Union and the fiscal cliff is over. Housing has rebounded mainly due to the decline of inventory and continued low interest rates. It seems that confidence is rising overall. While there are always economic issues, as bad as the rest of the world is, the U.S. is a lot like the smartest kid in summer school. One could argue that these reasons still don’t justify record highs in the stock market.
We believe that there are two large non-economic factors influencing prices. Global central bank intervention is playing a major role in the behavior of asset prices. The level of continued support from global banking systems and the high levels of fiscal support are unprecedented. It seems that these institutions are intent on managing economic outcomes. After Fed Chairman Bernanke said that quantitative easing cannot continue, this may have resulted in three out of the last four days of triple digit sell-offs. After these comments, the bond market also dropped significantly during the last week of May as did REITs (real estate investment trusts) and commodity prices.
The second reason we think the market has hit new highs is simply the lack of any other attractive options to the average investor. In the traditional sense, an investor builds their portfolio with stocks, bonds, and cash. Cash has been yielding close to zero for a few years now and with interest rates at record lows, when they do rise, bond prices could decline significantly. In regards to bonds, we think we may be in a more dangerous situation now, than we were in 1994 when people who invested in long-term US treasury bonds lost more than 11% within nine months.2When people hear the word “duration” in regard to a bond portfolio, many think that is the term until maturity. Duration is actually a measure of risk and a bond’s sensitivity to interest rates. The higher the duration, the more sensitive it is to interest rates rising or falling. For these reasons, stocks may be the most attractive of those three options, but overweighting stocks while the market hits new highs is not advisable in our opinion.
While there’s no guarantee that the markets will correct anytime soon, we think we are long overdue. In an effort to reduce the risks mentioned above, our strategy has been to use different investment approaches and other alternative investment solutions.3Unlike traditional bonds, some of these alternative investment solutions can provide protection against rising interest rates and avoid the daily emotional buying and selling of the stock market. As always, if you have any questions feel free to give us a call.
In company news, I was very flattered to be named as one of the Top 400 Advisors in America by the Financial Times. Brad Glickman and Samantha Fraelich-Rohe have been quoted in The New York Times and the Wall Street Journal along with many other media outlets over the past several months. Both have also appeared on Fox & NBC news several times and you can find those interviews on our YouTube page below:
As we approach the summer season, from all of us at Bernard R. Wolfe & Associates, we want to wish you all a safe and happy summer.
3Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees Alternative investments can be volatile. Often managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently higher risk. There is often no secondary market for an investor’s interest in and none is expected to develop. There may be restrictions on transferring interests. These products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S.markets. Additionally they often entail commodity trading, which involves substantial risk of loss.
Fiscal Cliff Commentary
January 4, 2013
First and most important, we hope all of you enjoyed the holidays and we wish each of you a happy, healthy and prosperous 2013! As we start his new year, I found something amusing in a list released by Lake Superior State University of “12 Misused, Overused, Useless words of 2012.”1 The terms, “Fiscal Cliff” and “Kicking the Can Down the Road” both made the top of the list. While we can agree that many Americans are tired of these phrases, we felt it was important to mention both of them to all of you in regards to the deal Congress passed late Tuesday night.
While it is positive that Congress prevented most of the Bush tax cuts from expiring, they did once again “kick the proverbial can down the road” since this plan did nothing to address the very large issue of our deficit. We didn’t have a complete psychological shock or a meltdown in the markets because a deal was made, but in our opinion, the jury is still out. No matter which side of the aisle you sit on, everyone was affected by the deal that was passed. Most Americans anticipated that taxes would eventually need to increase, but that typically came with the understanding that deficit cuts would also be addressed. Unfortunately, there is still much work to be done on Capitol Hill. We expect continued market volatility in the beginning of 2013 since this bill didn’t raise the debt limit or address spending cuts. This will likely create another fiscal crisis towards the end of February since spending cuts are very unpopular and tough to compromise on.
Where we expect to see this affect the economy most noticeably is in decreases in consumer non-durable spending such as food, clothing and gasoline. Economic growth may slow to near zero in the first half of 2013, however, we hope that pent up demand and much improved balance sheets from consumers and corporations may allow growth to increase in the 2nd half of 2013. That said, as in all new tax deals, our goal for our clients is not to practice tax evasion, but to continue to practice tax avoidance as we always have.
Here is a summary of the major points of the deal that was passed and we also included a link to a white paper if you would like more detail than what is described below:
• Social Security tax: increases back to 6.2% (from the stimulus 4.2% level) for wages up to $113,700.
• Medicare Tax: The new and additional .9% Medicare tax rate (increased from 1.45% to 2.35% total) will be required, as originally scheduled, to be withheld by the employer for wages over $200,000—even though this additional tax liability is applicable only to wages of joint filers over $250,000. Directors (and other independent contractors and partners) have an additional .9% tax (with the Medicare portion increased from 2.9% to 3.8% total) on self-employment amounts. Again, this is for self-employment income of joint filers over $250,000.
• Income Tax: Extends decade-old tax cuts on incomes up to $400,000 for individuals, $450,000 for couples. Earnings above those amounts would be taxed at a rate of 39.6 percent, up from the current 35 percent. Also extends caps on itemized deductions and the phase-out of the personal exemption for individuals making more than $250,000 and couples earning more than $300,000.
• Capital gains, dividends: Taxes on capital gains and dividend income exceeding $400,000 for individuals and $450,000 for families would increase from 15% to 20%.
• Estate tax: Estates would be taxed at a top rate of 40 percent, with the first $5 million in value exempted for individual estates and $10 million for family estates. In 2012, such estates were subject to a top rate of 35 percent.
• Alternative minimum tax: Increases the AMT exemption amount from $33,750 to $50,600 (and from $45,000 to $78,750 for joint returns) in 2012 and permanently addresses indexing it for inflation to prevent nearly 30 million middle- and upper- middle income taxpayers from being hit with higher tax bills.
• Other tax changes: For five years, extend expansions of the child tax credit, the earned income tax credit, and an up-to-$2,500 tax credit for college tuition. Also extends for one year accelerated "bonus" depreciation of business investments in new property and equipment, a tax credit for research and development costs and a tax credit for renewable energy such as wind-generated electricity.
• Unemployment benefits: Extends jobless benefits for the long-term unemployed for one year.
As always, we are here to answer any questions and discuss how these changes may affect you and your family. Again, best wishes for 2013!
Link to white paper:
2013 Fiscal Cliff Greenberg Whitepaper
1 12 misused, overused, useless words from Lake Superior U
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.
September 24, 2012
Brad, Samantha and myself just returned from a due diligence trip to Chicago where we met with many of our investment strategists and multiple economists. As we approach the last quarter of 2012, we thought this would be a good time to discuss our current viewpoints with regard to the markets, economy, and taxes.
We are taking a closer look at some of the economic data and assessing how it relates to the stock market returns we are experiencing. To start, there are some positives economic signals. We have seen signs suggesting that the housing market may be bottoming. Existing home salesrose 2.8% in August to an annual rate of 4.82 million units -- the fastest rate since May 20101and well above analysts' expectations, so houses appear to be selling faster. With the exception of student loans, consumer balance sheets are improving dramatically as well. While these are two positive signs in our recovery, we are not sure that they are the catalysts driving the recent stock market returns. The Fed just announced (again) that they will take aggressive steps to help stimulate our economy, which we believe is driving the recent stock market returns. While we all like to see the stock market rise, we’d rather see this rally be driven by true economic growth such as increased consumer spending and an improving job market. All of the liquidity the Fed is pumping into the markets may create favorable markets in the short-term, but we are worried that this provides a false sense of security. When the Fed eventually stops pumping money into the system, we may have much farther to fall.
Overall, we believe that the positive signals are outweighed by the negative, especially as it pertains to growth. The recent stock market increase has taken place in spite of what can be categorized as weak economic growth both domestically and abroad. Forward-looking economic indicators are not showing enough major acceleration to justify the equity market rally either. The growth prospects are only 2% in Europe and only slightly better in the United States at 2-3%.2 In our view, the discrepancy between the stock market and economic reality cannot be sustained. The outlook for traditional bonds does not appear to be much better. Interest rates cannot fall much further limiting appreciation potential. Bond prices are so high that they have now outperformed stocks over the trailing 30-year period. Believe it or not, this is the first time we’ve seen this since the Civil War.3Because of this extremely long rally, many investors traditionally think of bonds as a “safer” part of their portfolio, but there is a potential bubble looming in certain areas of the bond market. We expect the relationship between stock and bond prices to revert back to the norm at some point, and therefore do not believe that certain bonds along can be counted on to provide the diversification6that portfolios require.
There is also a great deal of uncertainty as to what our fiscal policy will look like in 2013. Obviously, the election will have an impact on how this all plays out. The Bush tax cuts are set to expire on December 31, 2012 and it’s our opinion that neither political party wants to push our country into recession again. Therefore, we expect some sort of bipartisan agreement to extend the Bush Tax Bill to some point in 2013 after the new Congress has a chance to be sworn in and tackle this task. We fear that combining the already sluggish growth in this country with huge tax increases could send our economy into recession. This is not a political statement and it does not matter who wins in November. When you already have 23 million people unemployed and the government hits the country with additional taxes, it’s easy to see that this would likely force more to the unemployed ranks. A tax increase along with spending cuts would cut GNP by 4% according to Saumil Parikh, a managing director at PIMCO.4If this is true, and we are only growing at 2-3%, by definition, this would put us into a recession. As we are all aware, our concerns about the economy are relatively minor compared to those in Europe. Aggressive moves this past week by the head of European banks is good news in that it helps assure us that the Euro will remain, but it puts a tremendous amount of pressure on Germany and a few of the other somewhat solvent countries.
Nobody has a crystal ball. As investors, we continue to believe that we must take a cautious, disciplined approach. While Bernard R. Wolfe & Associates continues to be defensive with our approach to portfolios, it is not to say that there are no opportunities in the equity markets. Our strategists are on the lookout for just that. We believe that most portfolios need to be composed of some bull market strategies, some bear market strategies and alternative investments.5The percentages of each depend on several factors such as age, tax concerns, required rates of return, income needs, as well as liquidity needs. We have utilized the above with most of our clients, and we have been able to capture a good portion of the upside while avoiding some of the large slides suffered by the equity markets this year. We think our strategy and modern day approach to diversification6 is working. Due to our flexible style of investing, changes can usually be made among conservative and aggressive strategies quickly and without additional cost to our clients. Of course, changes may result in tax implications. However, recognizing gains while they are at historical lows may not be a bad thing.
We believe it is very important to have conversations with our clients over the next few months to discuss possible year-end tax/planning strategies. The overall climate may change dramatically come January 1st. We encourage you to call us to schedule a year-end strategy session to discuss your financial situation and potential changes to be made prior to the end of the year.
In our continuing effort to provide all of you with the best service possible, I wanted to introduce two of our newest associates. Michelle Diallo who will be involved in our financial planning and securities operations, as well as Michelle "Mickey" Henderson who is working with Diane Jones in regards to firm operations and compliance. We hope you will help us welcome both of them to our team.
Finally, a big thank you for the recent introductions you have made on our behalf. We appreciate your trust in introducing us to your friends, families, colleagues, and centers of influence, such as your CPA's or attorneys. These introductions are vital to our continued growth.
All the very best,
5 Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees Alternative investments can be volatile. Often managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently higher risk. There is often no secondary market for an investor’s interest in and none is expected to develop. There may be restrictions on transferring interests. These products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S.markets. Additionally they often entail commodity trading, which involves substantial risk of loss.
6Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
March 13, 2012
Over the last few months, we have seen a cyclical (short-term) rally in several different asset classes including the broad US stock indices. We are in an environment in which daily headlines dictate short term price performance. These daily headlines include but are not limited to political factors. While a lot of the focus has been on day to day price movement, over the long-term we still believe that fundamentals (earnings, valuations, etc) will drive performance.
The economic landscape for 2012 is showing some positive signs. The unemployment rate has come down to 8.3% and we believe housing may be set for a rebound. 1The debt payments as a percentage of disposable personal income is down to 11% from a high of 14% in 2007 and is the lowest it has been since before 1980. 2With home prices severely depressed, historically low mortgage rates, and a lot of cash still on the sidelines, we believe that owning a home is becoming more attractive than renting for many. In fact, as of the 4th quarter of 2011, the average monthly rent was $708 while the average monthly mortgage payment was $521. 2As home ownership demand increases, home prices may increase and the percentage of debt to equity would decline. This would help increase consumer confidence and consumer spending as well. As of now, consumer confidence is still relatively low compared to the norm, but historically, that has been a positive signal for the stock market. As the famous investor Warren Buffet has said time and time again, we should be greedy when others are fearful and fearful when others are greedy.
While all of this may sound encouraging, there are still issues which could negatively affect the stock market in 2012. Some of these include the threat of a nuclear event between Iran and Israel, the Eurozone debt issues, and our own need for fiscal reform.
Although we have had a significant rally since the lows of 2009, we still believe this is just a short-term rally or what you have heard us refer to as a cyclical bull within a secular (long-term) bear market. We do not believe that the recent rally is the beginning of the next secular (long-term) bull market for multiple economic reasons, but especially due to the fact that stocks are not particularly cheap compared to historical averages. For all of the above reasons, we are not overly optimistic nor are we overly pessimistic about the near future for stocks.
We do however, have a lot of concern over the future of long-term bonds. Currently, the duration on 30 year bonds is 19.5. This means that with a 1% rise in interest rates, 30 year bonds would lose 19.5% of their value.3 For this reason, we are working with strategists who have more flexibility in their bonds holdings than typical core bond funds would. Since neither stocks nor bonds are without major risk, we are even more convinced that alternative investments should be playing a role in our portfolios. 4Alternative investments can help provide 5diversification to a traditional stocks and bonds portfolio, and while Alternative Investments carry additional risk, they also can potentially provide very attractive income streams in a low interest rate environment.
As we speak with you individually in 2012, we will discuss whether or not certain alternative investments may be suitable for each of you. We continue to seek opportunities even in these challenging market environments and appreciate the continued trust you have placed in us.
1 “Unemployment Drops to 8.3 Percent in January 2012,” National Conference of State Legislature, February 6, 2012
2 Source: JP Morgan Asset Management Census Bureau Fact Set
Monthly mortgage payment assumes a 20% down payment at prevailing 30 year fixed mortgage rates. Analysis based on median asking rent and median mortgage payment based on asking price.
3 U.S.Treasury, Barclays Capital, FactSet, J.P. Morgan Asset Management
4 Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees Alternative investments can be volatile. Often managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently higher risk. There is often no secondary market for an investor’s interest in and none is expected to develop. There may be restrictions on transferring interests. These products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S.markets. Additionally they often entail commodity trading, which involves substantial risk of loss.
5Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
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2011 Year End Commentary
December 29, 2011
As we near the end of 2011, I find myself reflecting over my 30+ years in the business and how investment philosophies have changed dramatically. I am amazed when I see several of the larger mutual fund companies continuing to use, what I believe is an outdated comment “it is time in the market, not timing the market.” Unfortunately, our feeling is that this buy and hold mentality will no longer work unless you have an 80 year time horizon. We should expect the volatility we see in the markets today to be the norm going forward. As investors, we must be quick on our feet and properly diversified3. If all of your investments are moving in the same direction at the same time, then you are not properly diversified. It is no longer enough to have only stocks and bonds in a portfolio. In today’s unpredictable and volatile environment, we believe portfolios, when appropriate, should also include alternative investments which do not fluctuate with the day to day drama found in the equity markets. We believe alternative strategies2 can serve as an important hedge and diversification3 tool.
I recently saw a comment by Saumil Parikh, a managing director at Pimco, in which he states: “We are transitioning into a world where policy makers and politics will become the predominant drivers of investment returns.” This means that a company’s fundamentals may no longer be the driving factor for a stock’s performance. It may become more important for a manager to be in tune with the political landscape and what fiscal action may be taken. This would put us in a very different investment environment than we’ve ever experienced.
Our markets continue to swing in both directions depending on the daily news out of Europe. What remains to be seen is whether the stronger countries will come to the aid of the others. This is a more difficult issue than many realize. If the stronger countries do come to the rescue, they endanger their banking systems who have loaned significant amounts already to Italy, Greece and Spain. This could affect our banks that have significant exposure to the banks of those core countries.
For the US economy to improve, more people need to be put back to work. As of this month, the unemployment rate is approximately 8.6%1(although that does not include the significant underemployment that exists today). Continuing to reduce our unemployment situation could also help revive our real estate market. It may also prompt the consumer to become more positive which would translate into more contributions to our GNP.
My wish for this holiday season is for Congress to craft a fiscal policy that reduces deficits in the long run while supporting the recovery in the short run. Finding a long-term solution for the US debt could change everything. Money can be made during these uncertain times and rest assured we are always looking for those opportunities that might be suitable for each client’s situation.
In closing, as always our entire team is available to answer any of your questions. Please do not hesitate to call.
From all of us at Bernard Wolfe & Associates, Inc, have a happy and most importantly a healthy holiday season and 2012.
1“Labor Force Statistics from the Current Population Survey” Bureau of Labor Statistics, December 2, 2011
2Alternative investments involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees Alternative investments can be volatile. Often managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently higher risk. There is often no secondary market for an investor’s interest in and none is expected to develop. There may be restrictions on transferring interests. These products often execute a substantial portion of their trades on non-U.S. exchanges. Investing in foreign markets may entail risks that differ from those associated with investments in U.S.markets. Additionally they often entail commodity trading, which involves substantial risk of loss.
3Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.
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August 10, 2011
Since Standard and Poor’s (S&P) downgraded the US long-term sovereign debt rating last Friday, the markets have been quite turbulent. The S&P downgrade occurred for many reasons:
- Congress passed the Budget Control Act on August 2nd, but fell short of creating a disciplined and long-term plan to maintain the AAA rating.
- The recent events on Capitol Hill have made S&P and many others wonder if our leaders are willing make the hard decision to get our house in order.
- Our debt burden to GDP ratio is much higher than several of our peers. To illustrate, Canada’s debt is only estimated to be 34% of GDP, Germany’s at 52%, while ours is 74%. 1
The downgrade did not have the effect on interest rates everyone feared it would. The US Treasury sector remains the largest and most liquid fixed income market in the world. There are few if any alternatives with as great a degree of price transparency and safety. Europe and the Euro appear to be a much riskier bet from a credit standpoint.
Much of the developed world is facing high levels of indebtedness which typically result in slow economic growth. Add significant policy missteps to this and one has dramatically increased market volatility. Hopefully, something good can come out of all of this turmoil. Perhaps this serves as a wake up call to our elected officials. Addressing the fiscal issues in our country is a long term challenge. Short term fixes do not work. Our economy has always been the most resilient in the world, but its future depends on policy makers coming together to make hard decisions regarding our country’s debt crisis. If policy makers fail to do so, this weekend’s downgrade could be a sign of continued fiscal deterioration. While our problem may be financial in nature, we feel the solution is political.
Many are wondering if the environment today is as bad as it was in 2008. There is no comparison since the market performance in 2008 was the result of massive deleveraging by investors and institutions. During that period every asset class was falling except treasuries and cash. Here are a few reasons we think today’s environment is different than 2008:
- Our 2nd quarter earnings season is winding down and 77% of the companies in the S&P 500 have beaten their estimates and reported earnings growth of 18% 2.
- Revenue Growth rose by 13% 2
- S&P 500 companies have record amounts of cash on hand. Without including financial firms, America has $1.75 trillion of cash sitting on their balance sheets.3
- Many bonds fell just as much as stocks during 2008, but today, bonds are still positive while stocks have fallen.
- Job growth reports are still positive unlike 2008 where jobs were being slashed.
Of course, these fantastic earnings & revenue growth numbers could be mostly due to the stimulus, QE1 and QE2, but we won’t know if these earnings will continue without a QE3.
On Monday, selling pressure reached panic levels and on Tuesday, buying pressure reached panic levels as well. As I write this, it appears panic selling is the current theme again today. Most likely, there will continue to be volatility in the markets in the short-term, but we must remember that timing the market can be dangerous and is very difficult to do since you have to be right twice. We should also recall that some of the best single day market returns happen during the worst of times. This past Tuesday August 9th was a prime example of this type of occurrence.
As always, we encourage you to reach out to any member of our team at Bernard Wolfe & Associates, Inc, to discuss and revisit your goals, objectives, or risk tolerance.
1 CNN Money “Ouch! USA kicked out of Triple-A Debt Club,” Annalyn Censky, August 8, 2011
2 Bloomberg “US Stock Index Futures Extends Gains as ADP Job Growth Exceed Estimates. Michael P. Regan, August 3, 2008.
3 CTV News “Lack of Corporate Spending Marks a Different Kind of Cash Crisis, Gren Keenan August 8, 2011.
Past Performance does not guarantee future results.
August 5, 2011
As you are aware, the market had its largest drop in over two years on Thursday, August 4th. This market correction was not a major shock and we would not be surprised if there is more volatility in the days and weeks ahead. We have been expecting some type of market correction or retracement since 2010. As many of you have probably heard me say, even if this were the best of times, this market has gone up too high and too fast. Yesterday’s correction has little to do with the circus in Congress last week surrounding the debt ceiling. This has to do with concerns about Europe along with our anemic US economy. Despite this slow growth domestically, the markets have continued to rally since March of 2009. Due to our high unemployment, an expiring stimulus, and the impending government spending cuts, we believe we still find ourselves in a long-term bear market highlighted by shorter term rallies and retracements. For this reason, you have read in our commentaries or talked to us about the need for “rowing” and “sailing” strategies in a portfolio along with “alternative investments1.”These strategies can help provide a cushion for a portfolio in volatile markets, as well as opportunities for growth.
Clearly, these are uncertain times, but they are not unexpected. As al